Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?
A)hiring temporary workers from an employment agency rather than hiring part-time production employees
B)subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
C)leasing equipment on a long-term basis rather than buying equipment
D)lowering the projected selling price per unit
E)changing the proposed labor-intensive production method to a more capital intensive method

Question

Quizplus · Accepted Answer

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house can reduce the risk of a project by lowering the degree of operating leverage. This approach minimizes fixed costs (associated with buying new equipment) and increases variable costs, which in turn lowers the operating leverage. Operating leverage is a measure of how revenue growth translates into growth in operating income, and a lower degree of operating leverage means that a company or project is less sensitive to changes in sales or production volumes, thereby reducing risk.

Which One of the Following Will Best Reduce the Risk